The oil price conundrum

Between ups and downs, the month of August has seen a re-balancing of oil markets, with the main qualities on a downward trend, OECD stocks dropping, and the Russians and Chinese showing their hand for their next energy moves

In August, Brent North Sea quality opened at $51.52/b and closed at $52.85/b, while West Texas Intermediate price reduced, moving from $49.03/b to $47.11/b. At the time of writing, Brent crude was quoting at $54.02/b, while WTI was trading at $49.12/b.

During the first part of the month, both the European and Asian benchmark and the American reference were quite stable. In particular, on August 9th, Brent quoted at $52.76/b because the futures related to this quality returned in backwardation, while WTI reached its monthly high at $49.81/b.

Subsequently, oil prices diminished and on August 16th, both qualities touched their monthly low, quoting at $50.34/b and at $46.79/b as OPEC compliance to the November 2016 agreement fell to 75% and U.S. oil production overcame 9,500,002 b/d for the first time since July 2015. Moreover, this latter data explain to us why WTI bearish trend was stronger than Brent tendency.

During the last ten days of August, Brent prices raised thanks to the dollar depreciation over the euro – 1.2048 €/$ on August 29th, the lowest since January 2015 – whereas the WTI did not significantly recover as a consequence of Hurricane Harvey, which hit Texas. In fact, refinery outages means a steep drop in oil demand (-5% in comparison with the 3rd week of August).

In our previous report, we wrote that if the price of Brent – returning to backwardation at the end of July – had continued in the next weeks, it would have contributed to opening a new scenario for OPEC and non-OPEC producers. On one side, the strong demand – estimated to grow by 1,500,000 b/d in 2017 – confirms our theory however, OPEC and non-OPEC producers must take care of their last arrangement because the American fracking producers are still increasing their output (9.530.000 b/d on August 25th), despite the persistence of some clouds on the horizon.

Latest data and estimates on oil & gas

According to the data provided by the Oil Market Report published by the Energy Information Administration on August 11th, in July global oil supply increased by 500,000 b/d year-over-year and by 520,000 b/d in comparison with the previous month. In particular, OPEC crude production rose by 230,000 b/d to 32,840,000 b/d (record high in 2017) thanks to the Libyan output recovery, which was above 1,000,000 b/d in late June.

OECD industry stocks dropped in June by 19,300,000 barrels to 3,021,000,000 barrels, but are still 219,000,000 barrels above the five-year average.

Global oil demand is estimated to grow by 1,500,000 b/d in 2017, reaching 97,600,000 b/d. The rebalancing of the market has been carrying on but, at the same time, we must take into account that stocks “are falling from a very great height in volume terms‘.

Based on the figures of the Drilling ProductivityReport published by the Energy Information Administration on August 14th, the American unconventional output is expected to increase by 117,000 b/d to 6,149,000 b/d in September. It is important to envisage that from now on, the Report, will present two important changes: the inclusion of the Anadarko region while the data from the Appalachia region will be the sum of those from Marcellus’ and Utica’s.

The U.S. crude production, after the peak of 9,627,000 b/d gained in April 2015, decreased to its lowest of 8,428,000 b/d on July 1st 2016. It then started increasing to 9,530,000 b/d, which was reached on August 25th 2017.

According to the data provided by Baker Hughes, the total current number of U.S. active rigs – 940 of which, 759 (80.7%) are oil rigs and 180 (19.1%) are gas rigs plus 1 miscellaneous (0.2%), on August 25th – decreased by 14 units in comparison with the data published on August 4th as a consequence of the Hurricane Harvey.

In June 2017, the U.S. crude oil imports decreased at 8,010,000 b/d. They were 8,397,000 b/d in May, 8,131,000 in April, 8,048,000 b/d in March, 7,890,000 b/d in February and 8,435,000 b/d in January (record since August 2012). Now, the current 2017 U.S. average crude oil imports of 8,151,833 b/d are clearly higher than the 7,877,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and 7,363,000 b/d in 2015.

Geopolitics of Oil & Natural Gas

Based on the data provided by the General Administration of Customs, the Russian Federation remains China’s top crude supplier for the fifth month in a row. China bought 1,170,000 b/d from Russia in July while the average monthly oil purchase in 2017 was 1,180,000 b/d (+16% y-o-y). Russian exports to China more than doubled over the past six years. In this way, Russia overcame Saudi Arabia as China’s first supplier while Angola occupies the third place.

At the same time, according to Reuters, Sberbank, the biggest bank in the Russian Federation, has been starting to sell gold to the Chinese financial institutions through the Shanghai Gold Exchange, which includes Russia’s second-largest bank VTB, for an amount of 6 tons to deliver before the end of the current year.

On July 18th, journalist Gianpaolo Rossi stated that “Serbank’s action is actually part of a more complex geo-economic strategy of ”de-dollarization’ of the world devised by Russia and China with the aim of striking a deep blow to the global role of the United States; and gold will be one of the levers with which to undermine the system, with emerging economies using it more and more as a means of payment.‘.

In accordance with the data published by the World Gold Country on August 3rd 2017, the Russian Federation keeps 1,716 tons of gold – 16.6% of its total foreign reserves – more than quadrupling them during the last 13 years. Russia is the sixth world gold stockowner, after the United States of America, Germany, Italy, France and China (for some analysts, Chinese gold reserves are strongly underestimated). After the U.S. President, Donald Trump, was forced to impose new restrictions and sanctions against Russia, the Russian government decided to “speed up the work on import substitution, reduce dependence on US payment systems, on the dollar as a settling currency and so on. It is becoming vitally important‘, stated Deputy Foreign Minister Sergey Ryabkov. “The US is using its dominating role in the monetary and financial system to impose pressure on foreign business, including Russian companies‘.

In our 2016 May report, it was put into light that Russian President, Vladimir Putin, "is on the verge of realizing a decade old dream: Russian oil priced in Russia".

This "dream" needs, at least, two prerequisites:

1. First of all, international oil traders must join the Russian emerging future market in order to disconnect the Urals from the world’s most used benchmark Brent;

2. Secondly, Russia should move away from quoting petroleum in U.S. dollars.

In conclusion, with regard to both the first issue – the main aspect of is the volume of oil traded – and to the second point – which has to do with the role of guaranteeing that the gold is repurchased into the international monetary system – the impression is that China and the Russian Federation have a clear and common strategy. Moreover, the entrance of China Energy Corporation into Rosneft capital stake (14.16%) for an amount of $ 9,100,000,000 on September 8th further reinforced our impression.

By chance, on August 23rd, the Bundesbank, German’s Central Bank, stated that it has brought back 674 tons of gold reserves kept in Paris and New York since the Cold War. Previously, on June 13th, the European Central Bank said it converted 500,000,000 € of foreign reserves to RMB (renminbi) during the first half of 2017, adding the Chinese currency to its reserves for the first time.

Last, but not least, during the BRICS meeting in course in Xiamen, China communicated the intention to pay oil in Yuan, convertible in gold.